SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

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Podcast – Your Real Estate Journey

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My latest podcast where I along with Jo Garner and Richard Scarbrough talk about beginning your real estate investing journey and some of the things you should consider if you want to get into real estate investing.  Originally aired on AM 600 WREC on 1/7/2012.

 

 

Why I Dread January

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I dread January.  Not just because it is cold but also because I have to start thinking about income taxes and our state legislature comes back into session.  Every year you can be guaranteed that someone in the legislature will propose a bill that will make it harder for me to be a landlord.  A bill I will have to oppose.  This year is no different.

 

This year it is HB 2227.  If you are an investor in Tennessee, you should be concerned about this bill.  This bill will create a registry of all rental properties and their owners, charge me for the privilege of registering and then threaten me with fines and eventual jail time if I fail to register.  It would also require me to create a registry of all of my tenants by keeping a copy of an “appropriate ID.”

 

A registry is unnecessary as the county property assessors have that data anyway and why do they care who I rent my properties to?  I suspect there is more to this bill that will come out in the coming years.  This bill will do nothing but create a further burden on an already burdened industry.  It is all about gaining more control over the real estate investing industry.

 

I guess they think I don’t have enough to do in my business.  I now have to shift time and resources towards fighting this bill.  Time and resources that could be used much more productively growing my business.

 

I do not know who said it but I tend to agree more and more with this quote every year, “Our legislature meets once a year for 99 days.  But I wish they met for only one day every 99 years.”

 

I’ll have more to come on this issue as it develops.

What Properties Should I Invest In?

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I have often been asked by people wanting to get into real estate investing for advice about the types of properties they should invest in.  There are so many different kinds of real estate investment types, from single family homes, to farms to industrial parks and there is nothing wholly right or wrong with investing in these various types of real estate.  Each has advantages and disadvantages.   But in my experience, residential real estate is the easiest to get into and the learning curve is the shortest.  So for the new investor, I recommend residential real estate investment properties and that is what I am going to discuss in this post.

 

There are three types of residential investment properties.  All three can be great investments.   Just be aware of the advantages and disadvantages of each type before investing.  Let’s go through each one.

 

Single Family Homes – Single family homes are properties with just one dwelling unit in them.  They can be detached homes on acre lots, town homes, even condos fall into this category.  Single family homes can be great investments.  One of the best features of single family homes is that they generally are the only properties you can sell on the retail market.  You often therefore can get a higher sales price when you sell than you would with other type of residential properties.

 

In today’s market there are many, many homes out there that are priced right and will generate positive cash flow.  In fact, right now they are the cheapest I think they are going to be for a long time.  Even thought prices have declined, rents have not.  Properties in desirable neighborhoods can bring good rents and very stable tenants.

 

New investors can also get some very favorable financing for single family investment properties right now.  Rates are currently amazingly low.  Investors with W-2 (regular job) income and a good credit score can get up to 10 investor loans with low fixed rates financed over 30 years, just like you can with an owner occupied house.  So both pricing and loan rates make this type of investment property very attractive.  (Here is a tip.  If you are married be sure to put these loans in only one spouse’s name.  That way you can get 20 loans, 10 in each spouse’s name.)

 

In many areas however, the prices of single family homes are far higher than the rental income they will produce can cover. In other words, unless you are paying in cash for an expensive home or have a large down payment, the amount you will have to finance will not create positive cash flow.  Be careful buying in pricier neighborhoods.

 

A downside to single family homes is the fact that when your tenant moves out, your house is vacant and producing no income.  You need to move quickly to get your property re-rented.  Vacancy is a cash flow killer!  For example, if your monthly cash flow is $150 per month on a home that rents for $900 per month and it remains vacant for a full month, you have just lost 6 months of cash flow profit.  Plus, when they are empty, they are more prone to theft and vandalism.

 

Duplexes, Triplexes and Four-plexes – These are the two, three and four unit properties or smaller multi-unit properties.  These also make great first time real estate investments.  The main advantage here with these multi-unit properties is that they will still produce income when one unit becomes vacant.

 

Another advantage for the newer investor, you can often get the same types of loans mentioned above with single family homes.  This is because Freddie Mac and Fannie Mae, the buyers of these loans, treat these multi-unit properties the same way they treat single family homes.

 

These smaller multi-unit buildings can still possibly be sold to owner occupants.  So the market for these properties is a little stronger than it is for others.  They can often be sold to someone like me perhaps.   When I was beginning my investing career, I wanted to generate some extra income so I bought a duplex and lived in one side while I rented out the other.

 

Apartment Buildings – Apartment buildings are properties that contain five units or more.  These types of properties can really be income producers.  However, they can also be real drains if they are mismanaged.

 

Management of these types of properties has to be strong or they can quickly get out of hand.  Tenant issues and faulty maintenance can quickly add up to a negative cash flow situation.  You might think you can hand this type of property over to a property management company.  But if you do not know how to manage your property or manage the property management company, you will end up on the short end of the stick every time.

 

Financing these properties is also much harder.  Say goodbye to 30 year loans that you can get with the above properties.  To purchase these types of investments, you will most likely need to go to a local bank and get an officer’s line of credit or commercial loan.  These loans have significantly higher rates and much shorter terms.  Often terms of 5 years or less.  In this way they are very much like commercial or industrial properties.

 

Selling these properties is also much harder than with other types of residential investment properties.  Think about it.  Who is going to buy these types of properties?  Certainly not a retail buyer, but another investor who is going to be looking at the same cash flow numbers you were when you bought the property.  In other words that investor will be looking for a deal just like you were.

 

What should you buy if you are just starting out?

 

I would suggest starting with a duplex, triplex or four-plex.  You can generally get decent, long term financing.  They will produce income with multiple units as opposed to sitting vacant.  The resale market is fairly good for these types of properties.  These three factors help reduce the risk for you first time investors.  If these types of properties are not available where you live, then go for single-family homes in stable neighborhoods for many of the same reasons.  Whatever you decide to do, do get into real estate investing today.  Make it a goal to buy one or two investment properties this year.  The combination of low prices and low rate may not be seen again for a long, long time.

Will 2012 = Less Vacancies & Higher Rents?

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The vacancy rate for apartments in the US fell to a 10 year low at the end of 2011.  According to Reis, Inc., the vacancy rate fell to 5.2%.  That rate is down from 6.6% a year ago.

 

And as the supply of available apartments decline, guess what goes up?  You got it, rents!  The average monthly rent for the US as a whole increased 2.3% over the past year to just over $1,000.

 

If you are planning on going to Yale University in New Haven, CT, start shopping early for a place to live as they had the nation’s lowest vacancy rate.  New York City, Minneapolis, Portland Oregon and San Jose California rounded out the top five.

 

California took the top two spots for effective rental rate increases.  San Francisco and San Jose were number one and number two with Chattanooga, TN, Austin, TX and New York filling in the top five slots.

 

Jobs are the key to these rent increases.  Both San Francisco and San Jose are seeing new jobs in the tech sector, while Randy Shelly with the Chattanooga REIA explained to me that “he is not surprised” as the Chattanooga area has had a new Volkswagen plant come on line and an Amazon.com distribution center make plans to expand.

 

It seems like 2012 may be shaping up to be a good year for landlords.  I can say that here in Memphis any apartment I have that becomes available has been re-rented fairly quickly in what are supposed to be the slow months of November and December.  But, I have not generally been able to push rental rates up yet.  What have any of you readers experienced?

 

UPDATE

Here is a link to an article in the Daily News which somewhat echos what I said above.  Rents have been pretty much stagnant in the Memphis area as have vacancy rates according to the article.  Perhaps the decrease in vacancy rates I have experienced is due to my particular sub-market.

The Many Hats of the Real Estate Investor

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The real estate entrepreneur (or any entrepreneur for that matter) wears many hats throughout their investing career.  This is especially true when they are just starting out.  As your business grows, you can hopefully begin to hire others to take some of those hats off your head, but some you will always wear.

 

Here is my list of the many hats I have worn and still wear to some extent today.  Some were expected.  Some fit quite well while others were difficult to put on to say the least.  As I write this blog in the coming weeks and months I want to be able to share with you how I wore these various hats, what I learned and what I would do differently if I had it to do over again.  In other words, learn from my mistakes so you can be smarter than I was.  Till then, here is my list.

 

  • CEO – You knew about this one.  Of course you are in charge, this is your business and the buck stops with you.  But it is not like sitting in an oak paneled office smoking cigars and collecting stock options.  You are the decision maker and your business will sink or swim due to the decisions you make, so choose wisely.  This is a hat you will always wear.

 

  • CFO – Are you good with spreadsheets?  Can you balance your checkbook?  Understand all those IRS rules?  I hope so, because as Chief Financial Officer you control one of your company’s most important assets, cash!  Some words of advice for you.  Watch every penny and put money aside every month for a rainy day because sometimes it storms and never take this hat completely off.

 

  • Acquisition Manager – You had better know those three words that drive all real estate, location, location, location.  Pick a good location (a neighborhood, a city or even a region), learn the numbers of that location and start farming it for properties to add to your portfolio.  You can teach others to do this, but keep this hat close.

 

  • Asset Manager – You have to keep your properties maintained or good tenants will go elsewhere.  That means they need to look nice and you need to fix problems quickly.  Tenant turnover is a killer in this business.  If you find a good tenant, work hard to keep them by giving them a nice, safe and secure place to live.  To do that you will need to wear a few of sub-hats here.

 

    • Contractor – Most likely when you are just starting out in the real estate business you are going to save many by fixing up the property yourself.  You will do some drywall, painting, refinishing floors, etc.  This is good because you do save some money and you learn how to do these things when you eventually do hire a contractor.  Pick up this book to help you.

 

    • Handyman – Do you know how to fix a washing machine?  How about replace an element on a stove? Patching a roof perhaps?  Better learn.  This book was really helpful to me.

 

    • Landscaper– Grass needs to be cut and leaves need to be raked.  Bushes and trees will need to be trimmed and trash picked up.  When you are just starting out this is one of the

 

  • Sales/Marketing Manager – You will need to sell your rentals to potential tenants.  Why should they buy from you?  Why is your property any better than the one down the street?  Putting a “for rent” sign in the front yard and hoping for the best is not enough anymore.  You need to be found and you need to show prospective tenants that you are a professional, and that they will be respected and treated well.

 

    • Webpage Designer – If you are not on the internet these days, the world is almost blind to you.  Professional designers can charge thousands of dollars.  This expense is unnecessary, especially when you are just starting out.  There are many services and programs out there that will get you up and running on the web for minimal costs.  Just look at the site you are reading.

 

  • The Legal Department – You will need to know your local laws regarding rental properties and evictions, otherwise you will make some stupid mistakes.  In addition to that there are zoning issues, building codes, housing codes and tax codes.  Better be at least aware of these things and know when and who to call when you need a competent attorney.  You can find one here.

 

  • Secretary – Need something mailed?  Need some stamps and office supplies?  Need copies made?  How about setting up those tenant files?  Heck, you even get to make the coffee!

 

  • Receptionist – You are the first contact people will have for your business and the old saying is true, you only get once chance to make a good first impression.

 

  • Housing Code Enforcement Officer – “You mean I can’t park on the front lawn?”  No.  “But I need that scrap metal for my sculpting class.”  OK, but you can’t keep it on the front porch.  “You just do not understand art.”  Be that as it may, the 10 foot tall inflatable Santa still in the tree in February needs to go.  How do you find out about these things?  Hopefully it is not because of a letter from the city, but because you are proactive and regularly drive by and inspect your properties.

 

  • Life Counselor – Our house rules state that we do not do tenant drama (it really does!), but sometimes you still get sucked in.  Roommates get in fights and want to move before the lease is up.  Couples split up.  People loose their jobs.  Life happens and you get caught up in it.  Be cool, calm and professional.

 

  • Mover – Need to get somebody out?  I have helped them load up the car to hurry things along.  Did I want to do it?  No.  Did I want them out of my property?  Yes.  Sometimes you just got to do what you got to do.

 

So there you have it, my list of 15 hats.  Did I miss any?  Let me know.  Until next time work smarter not harder.

5 Forecasts For 2012

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So I am going out on a limb here with some forecasts for the New Year.  I say forecasts rather than predictions because it is impossible to predict the future, but I can speculate a little based upon current conditions and a little base knowledge.  Forecasting 2012 is much like forecasting the weather.  I know for example that here in Memphis in the spring cold and warm air masses will begin to interact with each other on a more frequent basis.  Sometimes this interaction will produce tornadoes.  I cannot say however where those tornadoes will touch down or how strong they will be.  There are just too many variables.

The same goes for 2012.  I know based upon what is happening now, such as Federal Reserve money printing or government market manipulations that certain things are very likely to happen.  I just can’t say exactly when or how significant the impact will be.  For that we will just have to wait and see.

OK here goes:

1.  Commodities such as oil, copper, gold, building materials, etc will continue to increase in price.  These increases are the result of money printing by the Federal Reserve and soon also to be by the European Central Bank and Bank of China.  Newly printed money always hits the capital sectors of the economy first before it makes its way down to consumer goods.  This is why commodities like copper have gotten so expensive that people will now take grave risks to steal it.  I do not see any sign of the money printing slowing so expect commodities to continue to increase in price.

Why should you care?  Higher oil prices are like a hidden tax, especially on lower income folks.  They will either have to buy gasoline to get to work or pay you rent, but will not be able to do both.  Higher prices also make new home construction much more expensive, slowing it down in all but the priciest parts of town.  Eventually the new money will make it to the consumer sector and food prices will begin to rise.  That’s when things will get fun.

2.  Interest rates will begin to creep up.  The United States borrows $20,000 every second!  Well guess what, with loose spending like that no one wants to buy our debt anymore.  In fact some like the Chinese have been selling it off.  So as demand drops we have to offer higher and higher interest rates to unload our debt.  Unless of course the Federal Reserve steps in to buy the debt no one else wants by printing money.  Then rates may stay low but see Number 1 above.

Why should you care?  Interest rates affect real estate prices.  Higher interest rates will put more downward pressure on prices.

3.  The Chinese economy is in trouble.  I expect to see some real turmoil in the Chinese economy in the coming year.  China has made remarkable strides in the past few decades, but it is still a communist, centrally planned economy in many ways.  Thus the number of malinvestments in China is staggering.  This malinvestment of capital and resources is going to have to be corrected and that correction is going to be painful.

Why should you care?  China makes all our stuff now, where will we get it all?  If China takes a dive, who will buy all that debt?  See number 2 above.

4.  Real estate prices will not recover much.  There are still a lot of malinvestments (bad loans, useless condos) on the books and in the foreclosure pipeline in this country.  We have not even begun to reach the bottom of the foreclosure crisis yet as there are thousands of people underwater and not even paying their notes.

Why should you care?  These foreclosures and low prices translate into numerous deals for us investors.  It looks like the deals will keep on coming.  I hope you can get some sooner rather than later though (see number 2 above).  And be sure not to bet on price appreciation, unless you are a farmer.  Bet on positive cash flow to stay strong.

5.  Lending to real estate investors will remain flat.  Banks made a lot of bad decisions (malinvestments) in the past decade and a lot of that junk is still on their books.  They are either so backed up with foreclosures, or do not want to take the write downs, or simply no one wants to buy their bad loans and inventory.  In fact, I bet we will see bank closures and forced fire sales to other banks in the coming months.  Bottom line, the bankers are scared of real estate, especially investment real estate and will be for some time.

Why should you care?  One of the best things about real estate is leverage or using other people’s money (OPM).  Traditionally banks were the place to go to get OPM.  Those days are over for now.  Does that mean you quit as an investor?  No!  This is the best time to be buying real estate (you read number 4 above right?)  You must adjust.  Find private lenders and offer then a nice interest rate (especially now while rates are low!  See number 2 above).  Or find a wholesaler who has private financing in place.  They are out there.

So there you have it (wow that was a longer post than I thought it would be).  My five forecasts for 2012.  It is not all doom and gloom.  In fact it is a great time to be a real estate investor.  But one must watch the trends, study the data, make the forecasts and adjust accordingly.

Till next time, work smarter not harder and Happy New Year!

 

 

The New Real Estate Bubble?

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A new real estate bubble appears to be inflating,  No not in housing, but in farmland.

See here  and here.

Farmland, where the printed money is flowing.

 

 

 

 

 

 

 

 

It’s funny that they blame China for this.

Can’t wait for the first episode of “Flip this Farm.”

Remember the 80’s when this happened the last time?

Expect renewed interest in the Farm Aid concerts when the bubble bursts.

 

Top 5 Real Estate Investing Books

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Give a quick listen as I talk about my top 5 Real Estate Investing books.  These 5 books really helped (and still do help) me in my real estate investing career.  Then stop by the Smarter Library and order a copy for yourself.

Don’t see your favorite on the list?  Drop me a comment and let me know what your favorites are.

Podcast – Why Invest in Real Estate

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Check out my latest podcast where I along with Jo Garner and Richard Scarbrough discuss why you should invest in real estate.  Originally aired on AM 600 WREC on 12/3/2011.

Searching For Help? Join Your Local REIA Group

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A smart way to get help and advice with your rental properties (besides smarterlandlording.com) is to join your local Real Estate Investment Club.  I belong to the Memphis Investors Group and I can’t tell you how much this group has helped me.

Be Smarter!  Join your local REIA.

 

These clubs are not investment clubs that pool money and buy properties.  Rather, they are clubs of local real estate investors that get together for real estate education and networking.

 

Join up and get to know other investors in your area.  Most will be happy to share knowledge and info with you once they get to know you.  One of the great things about real estate investing is that my competitors are also my colleagues.  We often call or talk with each other for advice or feedback on deals.  Why is this possible? It is because there is so much real estate out there.  So join up and meet like minded people today

 

There are real estate clubs like the Memphis Investors Group in major cities all across the county.  To find one near you, take a look at the National REIA website.